Get new 'good faith estimate,' not 'worksheet,' for true loan costs
WASHINGTON — The federal government's efforts to eliminate home mortgage settlement cost surprises may have opened the door to a new — and potentially costly — set of consumer problems.
Starting Jan. 1, mortgage lenders nationwide were required to begin issuing new "good faith estimates" of loan fees and settlement charges. Under regulations issued by the Department of Housing and Urban Development, these estimates must be the same or nearly the same as the fees later charged at closing.
The idea is to eliminate the underestimation of fees. Under the old system, some lenders lowballed estimates to lure applicants away from competitors. The net effect was to hit consumers with fees that sometimes were thousands of dollars higher than the estimates.
In the past, there were no federal rules to protect the borrowers, and those who provided the low estimates were not held responsible.
The new good faith estimate, or GFE, requires lender-related fees to be identical from application to closing and allows just a 10 percent wiggle room for estimates in other areas such as title insurance and closing fees. When the charges at settlement exceed the estimates, the lender, not the customer, must pay the difference.
The new GFE also is designed to facilitate comparison-shopping on fees and other loan terms. It contains boxes allowing consumers to compare up to four lenders' quotes and estimates, each essentially guaranteed.
Consumer groups applauded the new rules. Banking and mortgage industry groups grudgingly accepted them but complained that the Jan. 1 start date was too soon for them to master all the complexities.
So how have the first two weeks of reforms been going? Not exactly as planned. Many loan officers and lending institutions are sidestepping the GFE by giving shoppers "worksheets" and "loan scenario" forms that come with no legal requirements for accuracy — and were not even contemplated under the reforms. They are substitutes for the new GFEs but are wide open to lowballing and bait-and-switch games.
The worksheets purport to contain much of the information provided by a GFE. Typically they are only issued when shoppers do not provide — or are asked not to provide — key information that constitutes an "application" under HUD's definition. For example, if a consumer does not provide the address of the property to be financed, there is no "application" and no requirement to issue a GFE.
Loan officers defend the worksheets as necessary adaptations to HUD's get-tough regulations on costs. They argue that HUD is forcing them to provide hard and fast estimates on services or charges that they cannot always know with accuracy, especially those involving title and settlement services.
"We can't be 100 percent certain on every cost that HUD is asking us to be certain about," said Steve Stamets, a loan officer for Union Mortgage Group Inc. in Rockville, Md. "So when there is no full application, or you've got people just shopping around, we can help them" with the worksheet estimate.
Tom Balk, a senior loan consultant for Mortgage California Inc. in Alamo, Calif., says the worksheets allow him to give clients "an accurate sense of the fees they'd pay if they move ahead to a full application," at which point he would be able to issue an official GFE.
Asked for HUD's position on all this, Vicki Bott, the agency's deputy assistant secretary for single family housing, said that although the reform rules are silent on the subject of worksheets, they "can be a useful tool when the consumer doesn't want to give enough information" to constitute a formal application.
However, Bott said, if worksheets are becoming commonplace and threaten to water down the consumer protections provided by the GFE reforms, her agency will possibly issue updated guidelines to lenders.
In the meantime, if you want hard and fast guarantees on fee estimates and you're serious about comparing competing loan costs, demand a GFE by name. If loan officers only will provide worksheet estimates, be on alert. The lowest quotes you get may not be for real.
Ken Harney can be reached at firstname.lastname@example.org.